Big media plays tough with Apple

Apple Inc will face a tougher time filling its iTunes store with television shows and movies as big media companies gird against repeating the music industry's mistakes.

NBC Universal, which decided last week to pull its shows from iTunes by the end of the year, is seen as only the first media company considering hardball tactics as deadlines approach to renew contracts to offer shows on iTunes.

The stakes are high for both sides. The media industry needs to court new viewers as interest in watching digital entertainment explodes. Apple, meanwhile, has staked its future on being the favored online storefront as it is set to debut a new line of iPod digital entertainment devices on Wednesday.

If there isn't any video you want to watch, the device itself is worth less money, Forrester analyst James McQuivey said of the iPod and other Apple products, such as the Apple TV set-top box and the iPhone.

Following NBC Universal's move, several media executives and industry analysts raise the possibility that TV programming could disappear from iTunes altogether if negotiations do not go well.

While sales of video programming is estimated at under 10 percent of iTunes' total $2.3 billion revenue this year, according to Forrester, less content could jeopardize sales of Apple's lucrative consumer electronics business.

Two media executives involved in discussions with Apple say they see an opportunity to seize control over their digital destinies, emboldened by NBC Universal's actions. They declined to be identified by name.

There's a substantial amount of hubris in the way Apple approaches the content industry, another media executive said. It would behoove Apple to be a bit more cooperative.

News Corp, Time Warner Inc, Viacom Inc and Walt Disney Co all have contracts with iTunes. One of them is due to expire by the end of this year, and another by next year, according to industry sources.

We're disappointed to see NBC leave iTunes, an Apple spokeswoman said. We hope they will change their minds and offer their TV shows to the tens of millions of iTunes customers.

PRICING, PIRACY TOP ISSUES

The biggest gripe is what media companies see as Apple's rigid, one-size-fits-all approach to pricing. TV shows cost $1.99 per episode, regardless of whether they ran last night or 20 years ago. Movies carry different pricing schemes, however.

NBC Universal cited Apple's inability to offer different pricing packages as a reason for its decision not to renew a contract expiring at the end of 2007. Discussions are ongoing.

Charging less for older shows could boost sales, executives say.

It's like if you walked into Wal-Mart and everything was priced the same, one media source familiar with talks with Apple said. It's ludicrous ... That's what's happening here.

Another source familiar with the talks agreed, In any other wholesale retail relationship, it wouldn't even be a debating point.

NBC Universal's move comes as it prepares to launch an online video joint venture with News Corp called Hulu.com this year. The site is expected to offer advertising-supported and paid downloads of TV shows and movies to compete with services such as iTunes and Google Inc's YouTube.

ITunes, the most popular retailer for digital media, now competes with a handful of well-financed distributors including Wal-Mart Stores Inc and Amazon.com.

By Monday, Amazon.com appeared to have met NBC Universal's demands. NBC Universal said it planned to offer its shows on Amazon's new digital download service in a deal that lets them offer a variety of content packages, including up to a 30 percent discount when consumers buy a full season of shows.

These options have led some companies to demand what was once the unthinkable -- changes to the iPod to address piracy concerns.

The iPod's initial success was driven by its ability to play songs without copyright protection alongside protected tracks purchased off iTunes. Owners of Hollywood and TV studios, fearful of the fate that befell the music industry, want a firm commitment from Apple to prevent the downloading of pirated shows and movies on the iPod.

When you look at an empire built on this illegitimate activity, it's very hard to swallow and say that, especially now that you're dominating, we don't expect you to help us in the clean up of this problem, one media executive said.

Some analysts, however, said big media's demands are far-fetched. I'm quite surprised that in this day and age that that request would have been made, Gartner's McGuire said. I can't even imagine how much work that would involve for Apple.

Then there are concerns about angering Apple Chief Executive Steve Jobs, whose track record with consumers should not be underestimated.

The conundrum we face here is he has the highest probability of success than anyone. You need to figure out a way that you work with them, said another media industry source. I'm motivated to make something work with them.